Author: Federico Giamporcaro
Publication date: 17.04.2024
Who may insolvency proceedings be brought against?
In the European Union, including Spain, insolvency proceedings, referred to as concurso de acreedores in Spanish, are applicable to both civil debtors and traders, regardless of whether they are natural or legal persons. The legal framework governing these proceedings is described in the Recast Text of the Insolvency Law (Texto Refundido de la Ley Concursal), established by Royal Legislative Decree 1/2020 of 5 May 2020. Specific provisions were introduced by Law 25/2015 of 28 July 2015, which addressed the insolvency of natural persons, providing possibilities for debt relief within insolvency proceedings. Furthermore, a draft law reforming the Recast Text of the Insolvency Law was adopted on 14 January 2022 to align with Directive (EU) 2019/1023, making restructuring and insolvency procedures more efficient.
Conditions for opening insolvency proceedings
In Spain, as in other EU countries, certain prerequisites must be fulfilled to initiate insolvency proceedings. These prerequisites can be categorized into subjective and objective criteria:
Subjective prerequisite: Insolvency proceedings can be initiated against any debtor, whether natural or legal persons, entrepreneurs, or consumers. However, the law specifies certain details, especially concerning commercial companies or consumers. It is important to underline that, public entities such as authorities forming the territorial organization of the state, public sector bodies, and other public law bodies are exempt from being declared insolvent.
Objective prerequisite: Insolvency is defined as the inability of the debtor to fulfill its financial obligations regularly. Consequently, the debtor's incapacity to pay its liabilities represents the objective criterion for initiating insolvency proceedings.
Parties that can apply to open proceedings
The party initiating insolvency proceedings can change depending on whether it is initiated voluntarily by the debtor or forced by the creditors.
If the debtor decides for voluntary proceedings, it must demonstrate to the court its current insolvency status or its imminent insolvency, indicating its inability to meet financial obligations regularly. The debtor is required to apply for insolvency proceedings within two months from the realization of its insolvency. However, during this period, negotiations with creditors to refinance debt can suspend the deadline, with an additional three-month grace period (during which creditors cannot pursue separate enforcement actions). Failure to reach an agreement within this timeframe makes it necessary for the debtor to apply for insolvency proceedings within one month.
Submission of the application and debtor's obligations
Debtors, whether natural or legal persons, are obliged to submit various documents alongside their application, including reports on economic activities, asset inventories, creditor lists, and employee details. These submissions must comply with specific requirements described in the Recast Text of the Insolvency Law.
Moreover, debtors have an obligation to collaborate actively with the court and administrators throughout the insolvency proceedings. This collaboration consists of passive compliance, but it also includes active communication of relevant information. Failure to fulfill this obligation may lead to presumptions of misconduct or negligence, potentially resulting in sanctions or being held responsible for the insolvency.
Conclusion
Understanding the grounds and procedures for insolvency proceedings is crucial for both debtors and creditors within the European Union and Spain. The legal framework described in the Recast Text of the Insolvency Law, offers a systematic method for facing financial hardship while ensuring fairness and efficiency in the resolution process. Compliance with the established criteria and obligations is essential, in order to face insolvency proceedings effectively.
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